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Module 4, Adjusting Entries, Video 3, Accrued Expense - YouTube
Channel: Else Grech Accounting
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hi else here and today we'll be talking
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about a crude expense adjusting entries
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and their impact on the accounting
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equation what are accrued expenses well
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accrue means to increase gather together
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or pile up expense means a cost you've
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had to get something or go somewhere so
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when a crude expense means to gather
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together the costs in the business which
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we have not as yet recorded or paid a
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period end
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so at period end what are we going to do
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about these costs that we've incurred
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but not recorded or paid costs incurred
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means we consumed or use something so we
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have to expense it not paid means we owe
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somebody so that's a liability at every
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period end we'll recognize the expense
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that is incurred but not recorded and
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the liability that is owed because we
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consume something without paying for it
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yet let's do an example to solidify our
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understanding and actually see the
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entries that impact the accounting
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equation ABC company earned income
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before taxes of fifty five thousand
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dollars this year the company is charged
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a tax rate of twenty percent of their
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income ABC company records their
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adjusting entries at year-end and their
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year-end is December 31st no taxes have
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been recorded or paid this year on
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February 28th of the following year the
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company pays their outstanding income
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taxes what entry if any do we have to
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make at December 31st what did we incur
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on December 31st we incurred a cost
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because taxes are a cost of earning
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income incurring a cost means we have to
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record an expense so how much of a cost
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did we incur well fifty five thousand
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times twenty percent is eleven thousand
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dollars so we have to record an expense
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of eleven thousand dollars at December
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31st why because we've incurred a cost
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this cost is unpaid so do we owe someone
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yes we all revenue Canada for the taxes
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we've incurred on our income but not
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paid that means our liabilities increase
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by eleven thousand dollars under the
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account called
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income taxes payable note is this an
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adjusting entry yes it is how do we know
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that well this is an internal
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transaction Revenue Canada didn't send
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us a bill and they didn't come knocking
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at our door we have to record a
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liability because we know we owe it and
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to make sure our liabilities are
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properly stated at the period end or the
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year end we have to record what we owe
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but I have not as yet paid
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it's an adjusting entry because it's
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made by the company to recognize that
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something has been consumed used or
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incurred but not yet paid now let's
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fast-forward to February 28th of the
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following year we're standing in
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February 28th that date what are we
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going to do well we're going to pay our
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taxes how much we know that we have to
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pay $11,000 in cash so cash goes down by
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that amount
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because we paid it now what's the other
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side of the entry a lot of students say
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that because we paid cash the other side
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of the entry should be an expense that
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that would be totally wrong why because
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we did not incur more expenses than we
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have already recognized at December 31st
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remember last year at December 31st we
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recognized income tax expense of eleven
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thousand dollars already we did not
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incur in other costs so we can't record
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an expense again so what's the other
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side of the entry remember that at
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December 31st rerecorded in income tax
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payable a liability of eleven thousand
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dollars that liability is still sitting
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in the account we've paid our obligation
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at February 28th so do we still have a
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liability no we do not and so we have to
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recognize that we paid our obligations
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and we have to get rid of the liability
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because it's been settled and we no
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longer owe anything the other side of
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the entry is therefore a reduction in
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the liability account called income
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taxes payable to recognize that we've
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paid it off what type of entry is this
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it's a transactional entry because it's
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an exchange between two parties plus it
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involved cash and we know that whenever
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cash changes hands
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it's a transactional entry it's also an
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external transaction because it's an
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exchange between two
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involving cash external transactions are
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always transactional entries now let's
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look at both entries together remember
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that the first entry is an adjusting
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entry made at the end of the period or
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year it's an internal transaction
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recording the fact that the company
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incurred a cost that they have not as
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yet paid so they have to record an
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expense because we incurred a cost and a
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liability because we owe cash in the
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future in the following year when we
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actually pay cash we have to do a
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transactional entry remember that this
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is an external transaction because we
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paid cash to an outside party and our
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liability decreases because we don't owe
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anyone anything anymore what's
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interesting about accrued expense
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adjusting entries compared to prepaid
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expense adjusting entries well
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prepaid expense adjusting entries start
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with a transactional entry sometime
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during the year and then they do an
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adjusting entry at the end of the year
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to recognize something has been used or
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consumed now accrued expense adjusting
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entries do an adjusting entry at the end
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of the year to recognize something that
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has been incurred but not as yet paid
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then we record a transactional entry
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after the year end to recognize paying
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off our obligations let's see that
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difference side-by-side prepaid expenses
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start as assets going in and out using a
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transactional entry and they end with an
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adjusting entry recognizing an expense
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accrued expenses recognize an expense
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and a liability using an adjusting entry
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and then have a transactional entry in
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the following year to get rid of the
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obligation and flow out the cash both of
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these have transactional entries and
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adjusting entries both adjusting entries
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happen at year end but the prepaid has a
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transactional entry first whereas the
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accrued expense has a transactional
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entry last in the year following the
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adjusting entry keep this in mind when
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you're working on adjusting entries and
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trying to decide what entries to make
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first so that's it right now for accrued
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expense adjusting entry in our next
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video we'll be focusing on accrued
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revenue adjusting entries
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